Energy as a Tool for Sustainable Development for African, Caribbean and Pacific Countries (EC - UNDP, 1999, 89 p.)

CHAPTER 2: THE SUB-SAHARAN AFRICA REGION

(introduction...)

Introduction

Moving Forward

Challenges and Opportunities

Energy in Africa Today

Regulatory and Legal Frameworks

Building Sustainable Energy Enterprises

Financing

Energy Prices and Economic Incentives

Technology Development and Standards

Regional Energy Trade and Cooperation

Institutional Strengthening and Professional Development

Ghana - Serving Increasing Demands

Mali - Reforming Institutions and Widening Access

Zimbabwe - Stimulating Growth through Reform and Diversification

Policies to Promote Sustainable Energy in Sub-Saharan Africa

Ghana - Serving Increasing Demands

CHALLENGES AND OPPORTUNITIES FOR SUSTAINABLE ENERGY

Ghanas energy sector is changing dramatically as the
government tries to restructure the power sector and introduce private
participation and competition. Industrial, economic, and social growth have all
suffered as a result of recent power crises in Ghana, and the country has
recognised that only by reforming the energy sector to address demands will the
economy get back on track.

Under the World Bank/IMF Economic Recovery Programme/Structural
Adjustment Programme, the government has withdrawn all subsidies on petroleum
products, but electricity tariffs still do not cover current costs. Attempts to
increase electricity tariffs to reflect marginal costs have largely failed.
Increases in the late 1980s and early 1990s, for instance, were quickly eroded
by inflation. Recent increases generated a wave of public protests which led to
a suspension of the new tariffs by the government. The recently established
Public Utilities Regulatory Commission (PURC) faces the difficult task of
setting tariffs free of political considerations but keeping in mind the limited
income of much of the urban workforce.

Raising electricity tariffs will help to overcome the most
fundamental barrier that restrains independent power producers and energy
service companies from entering the Ghanaian market. Tariff structures have been
a disincentive to investment in energy efficiency or grid-based renewable energy
options. The key challenge facing the Regulatory Commission will be to structure
tariffs that encourage energy conservation and efficiency while ensuring that
tariff increases are acceptable to the population as a whole.

Ghanas energy sector has some fundamental weaknesses,
which are reflected in the current power crisis threatening the national
economy. The National Energy Board (NEB) was dissolved in 1991, and since then
the energy planning and policy analysis of the Ministry of Mines and Energy
(MOME) (which had been supporting renewables) has been limited and ad-hoc. The
Volta River Authority (VRA), which is responsible for generation and
high-voltage transmission throughout the country, has undertaken more systematic
generation and transmission planning activities, but it has been unable to
secure timely approvals from government, and hence the necessary investment.
Even though the VRA formally employs an integrated resource planning approach,
its plans do not appear to take renewables and energy efficiency fully into
account. One of the challenges facing the country as a whole, therefore, is the
need to develop energy supply strategies that give due attention to renewable
energy systems and energy efficiency improvement.

POLICIES TO PROMOTE SUSTAINABLE ENERGY

Energy Sector Reform

A range of reforms has been implemented quite successfully in
the petroleum sub-sector. The power sector has received much attention, but so
far has produced few significant results. One effect of the current power crisis
is the way in which it has spurred the government into accelerating the pace of
power sector reform in Ghana. Thus prodded, the MOME is implementing
long-standing proposals to restructure the power sector and introduce private
participation and competition. The proposals open the door for independent power
producers and the creation of several distribution companies, either as
subsidiaries of the Electricity Corporation of Ghana or as separate companies.
The current piecemeal and crisis-driven implementation of these proposals needs
to be strengthened if the full benefits of reform are to be realised.

The mobilisation of local private capital and local
entrepreneurial/organisational initiatives through cooperatives and credit
unions is a good way to promote local commercial development and to respond to
electrification needs in low-income areas.

Investments in regional energy infrastructure could yield a host
of environmental and economic benefits. Examples include the proposed natural
gas pipelines from Nigeria and the Ivory Coast which would displace fuel oil use
at thermal generation stations, resulting in cost savings and local and global
environmental benefits. West Africas largest natural gas reservoirs by a
wide margin are in Nigeria, where 75% of all oil-associated natural gas is
flared into the open skies. Several international schemes have been put forward
to supply Ghanas combined cycle plant with the one million m3
of gas/day it would require.

Extending the regional grid (Ghana, Togo, Benin, and the Ivory
Coast are already connected) to Burkina Faso, Mali, and Nigeria would also help
to create a more competitive market, decrease vulnerability to drought, and
increase the prospects for tapping the hydro potential in Ghana and neighbouring
countries.

Integrating Renewables in the National Electrification
Programme

Towards the end of the 1980s Ghana launched a programme to
electrify the entire country by the year 2020. Many towns and villages have
since gone the traditional route of extending the grid, with little thought for
mini-grid and off-grid systems, many of which could be powered by renewables.
Joint public-private sector initiatives should be developed and implemented to
promote innovative, lower cost, and more rapid electrification approaches, and
to increase the penetration of renewables. This could be promoted through a
combination of national targets (such as system-wide quotas for renewable
sources or a specified number of PV lighting systems installed in primary
schools), financial mechanisms, and market transformation activities. Such an
initiative could yield substantial educational, environmental, and economic
benefits. Projects to convert burdensome municipal wastes and agro-industrial
residues into electricity should also be further explored.

Increasing energy efficiency

The ESMAP-supported initiatives have laid a strong foundation
for energy efficiency activities. Many industrial energy audits and efficiency
improvement measures have been implemented by trained Ghanaian engineers and the
scope for energy efficiency improvements in all sectors remains large.
Demand-side programmes should be expanded, perhaps by stimulating the market for
Energy Service Companies through improved access to low-cost capital. A
lease-finance facility for the purchase of capacitors turned out for all
practical purposes to be a failure as most consumers preferred to purchase the
necessary equipment either outright or under more favourable financing terms
provided by independent equipment suppliers. It is also very clear that the
demand for energy efficiency improvement measures will become even higher as
electricity tariffs increase as part of the Governments proposed package
of solutions for the current power crisis.

Energy in Transportation

As in most African countries, Ghanas road transport stock
is made up predominantly of second-hand vehicles from abroad. Fuel efficiency is
generally poor, and energy policy does little to address the issues of energy
and transport. Recent efforts by MOME, the National Petroleum Corporation, and
retailers to promote the use of household LPG were quickly "hijacked" by car
owners who began switching to LPG. Ironically, this has resulted in a new and
thriving market for LPG with private companies installing specialised auto-LPG
dispensers in many urban centres across the country. Promoting the further use
of LPG, switching from petrol to diesel engines, and developing reliable mass
transit systems, are some of the ways energy use in the transport sector could
be improved. Policy and technology assessments are needed to inform the
decision-making process.

Institutional Strengthening and Capacity Building

There is a dearth of professionals with both the requisite
experience and the commitment to promoting sustainable energy initiatives in
Ghana. The country has a good number of public and private sector institutions
(including universities and research institutes as well as government agencies
and non-governmental organisations) with the basic human resources and
facilities for energy technology development and policy research (See Box
12)."Twinning" or linking programmes between similar institutions in different
countries (NorthSouth as well as SouthSouth) could present dynamic
opportunities for catalysing the change process.

Policy Discussion Groups for Generating and Nurturing New
Ideas

One of the fundamental weaknesses of the energy sector in Ghana
is the absence of a continuous policy debate and consultation process.
Stakeholder consultative groups could be complemented by use of the Internet, a
powerful forum for generating and debating new ideas. Discussions could be
synthesised on a periodic basis and fed more formally into the policy-making
process through a variety of channels, such as seminars, work-shops, leaflets,
posters, etc.

THE ENERGY SECTOR

The Ministry of Mines and Energy has the main responsibility for
energy policy formulation and coordination. The Ministry of Finance provides
guarantees for loans for the utilities on behalf of the Government of Ghana and
also has responsibility for reviewing and approving power sector capital
investment programmes.

A competitive environment has been created in the petroleum
sector, with very high private participation in downstream petroleum
products retailing activities. Work is underway to introduce some
competition into the electricity sector: the first independent power producer
was established by the Ghana National Petroleum Corporation (Western Power
Company); the Public Utilities Regulatory Commission was established in October
1997; and the government is taking steps to introduce private participation and
competition in the power sector. Until late 1997, when the Regulatory Commission
was established, the MOME was involved in tariff setting and project
implementation as well as energy policy formulation. In December 1997 parliament
approved legislation for an Energy Commission, which will license and oversee
power utilities as well as petroleum and natural gas supplies.

Electricity

Until very recently power generation was based almost entirely
on hydropower. A major drought in 1982-1983 highlighted the need for thermal
capacity for back-up, but the country still depends largely on the two
hydropower plants completed in 1966-1972 (Akosombo, 912 MW) and 1981 (Kpong, 160
MW). The sector is also dominated by two power utilities:

· The Volta River
Authority is responsible for generation and high-voltage transmission throughout
the country, while its subsidiary, the Northern Electricity Department (NED),
takes care of distribution in the northern regions.

· The Electricity Corporation of
Ghana (ECG) was responsible for distribution throughout the country until the
establishment of NED in 1987. ECG is now in charge of distribution in southern
Ghana, where most people live.

The VRA was the main electricity exporter in the sub-region
until 1992, but since 1993 it has been importing electricity from the Ivory
Coast. VRAs 300 MW combined cycle gas turbine plant, the first of its kind
in Africa, is at an advanced stage of construction with 200 MW of gas turbines
already operational.

Energy demand has grown steadily since the onset of the Economic
Recovery Programme (ERP), and electricity consumption annual growth rates have
averaged over 10%. The high growth in demand with no increase in the supply
capacity has led to the present power crisis, with frequent power rationing and
load-shedding. Supplies to the largest single consumer, Volta River Aluminium
Company (VALCO), have been drastically reduced, and it is estimated that power
curtailment to the industrial sector alone could be responsible for a loss of
around US$500 million to the Ghanaian economy by the end of 1998.(VALCO consumes
a very large share of total electrical energy supplied by Ghanas main
generator, the VRA. After commissioning in 1967, its share rose quickly to a
peak exceeding 75% in 1968 and then dropped gradually over the years as other
users came online, falling below 40% in 1995. From the late 1980s to the onset
of the current power crisis, electricity supplied to VALCO had stabilised at
around 2,800 GWh per year.)

Renewable Energy

Renewable energy development also suffers from a lack of
commercial financing schemes and limited private sector involvement. An
innovation in the energy sector which worked very well during the 1980s was the
establishment of an Energy Fund, raised through levies on petroleum products and
electricity bills. This fund made it possible for the Ministry of Mines and
Energy - acting through the National Energy Board - to promote renewable energy
research and development in Ghana. The fund also made it possible for the NEB to
initiate, with the help of development cooperation agencies, a broad programme
of energy conservation and efficiency improvements. Today, there are several
successful renewable energy demonstration/pilot projects (e.g. solar
battery-charging centres and biogas-electric systems) and the general public is
well aware of the possibilities offered by solar energy technologies in
particular. The Energy Research Group (ERG) of Ghana and the Ghana Solar Energy
Society (GHASES) have also provided opportunities for policy-makers,
researchers, and entrepreneurs to meet and address issues of national
importance.

Ghana - The Economic Context

At independence in 1957, Ghana was the richest country in
Sub-Saharan Africa, with a per capita income of US$490 (in 1980 US dollars).
Over the next 25 years or so, political turmoil and economic mismanagement
brought Ghana to its knees, and per capita incomes hit rock-bottom in the early
1980s. Since the launching of a World Bank/IMF Economic Recovery Programme
(ERP)/Structural Adjustment Programme (SAP) in 1983, GDP growth rates have
averaged about 5% per year and the structure of the economy has changed
considerably.

Agriculture no longer dominates the economy: its share of GDP
dropped from 55% to 40% between 1980 to 1995. The service sector is now the
largest and fastest growing sector, accounting for 47% of GDP in 1995.
Agriculture still accounts for 50% of export earnings, however, and 70% of
employment. Cocoa alone occupies 25% of cultivated land, accounts for 20% of
employment and, until gold took over in 1992, was the single largest source of
export earnings.

In spite of its impressive growth rates, the Ghanaian economy
still suffers some rather fundamental weaknesses. Inflation stood at 120% in
1983, and is still quite high (28% in 1997) and subject to alarming fluctuations
(70% as recently as 1995). Interest rates are correspondingly high, hampering
investment. The Bank of Ghana raised rediscount rates in 1995 from 33% to 45% in
an attempt to squeeze credit expansion and encourage banks to invest in the
money market. In such a high inflationary regime, any investments yielding
returns lower than about 50% are generally considered unattractive.

When the first industrial census was carried out in 1962,
industrial production contributed about 10% of GDP. By 1976 its share had risen
to 21%, but it then declined sharply to around 8% in 1983, just before the
ERP/SAP was implemented. During the first half of the ERP (1984-1988), the
industrial sector recorded very high growth rates, averaging 11.2% per year and
then slowed to 4.5% per year from 1989 to 1994. Industrial production stood at
14% of GDP as recently as 1994. In recent years, mining, quarrying, electricity
production, and construction have out-paced growth in manufacturing, which
accounts for over 60% of industrial value added.

The Ghanaian industrial sector is made up of many small- and
medium-scale enterprises. The smaller enterprises are usually Ghanaian family
businesses that operate informally and employ simple or traditional
technologies. Large businesses are very often either wholly state-owned, wholly
foreign-owned, or are joint ventures between foreign and local interests (both
state and private). These include the Volta Aluminium Company, the largest
primary aluminium smelter in Africa (with 200,000 tonnes annual capacity), and
several large gold and diamond mining companies, which are among the most
energy-intensive industries in Ghana. Since 1987 the government has pursued a
policy of privatisation of state-owned enterprises.

Energy Efficiency

Energy efficiency has been one of the cornerstones of the
governments energy policies and there was an active and growing energy
efficiency programme, which has been slowed down by the current power supply
crisis. The latter half of the 1980s saw the implementation of a National Energy
Conservation Programme (NECP) with technical assistance from the World Bank/UNDP
ESMAP programme together with the Canadian International Development Agency.
More recently, in 1995, an Electricity Demand Management Project (EDMP) was
initiated as an integral part of the Takoradi Thermal Power Project under a
financial package with the International Development Association. The primary
objective of the EDMP is to promote private sector participation in the delivery
of energy management services (i.e. to perform key diagnostic and design tasks,
maintenance services, etc.) to industrial and commercial enterprises. An
Industrial Energy Assessment Centre (IEAC) has been established at the
University of Science and Technology, Kumasi, mainly to train students in energy
auditing techniques. MOME, in cooperation with the Private Enterprise Foundation
(PEF), has recently established an Energy Foundation with responsibility for
energy issues relating to the private sector business community as well as
member organisations of the
PEF.